Stockton's default linked to pensions — and a big stock market gamble

There are many ways to get a fix on the bankruptcy filing by the city of Stockton, Calif., but nothing quite says “What were you thinking?” like an overload of expense obligations and an ill-advised bet on the stock market. Stephen Winterstein, chief municipal strategist at Wilmington Trust Investment Advisors compared four main categories of expenditures to overall expenses in cities across the country and within California, and found Stockton's plight to be near fatal. Mr. Winterstein, who helps manage $4.5 billion worth of muni bond portfolios, zeroed in expenditures for public safety, debt service, pension funding and other post-employment benefits. In a cross-section of 118 cities around the country with populations of between 150,000 and 400,000, the median expense of those four combined categories represented 72.6% of general fund expenses. In a smaller group of 27 California cities, which like the larger group included Stockton, the median expense of the four categories was 76.7% of general fund expenses. In the case of Stockton, a city of nearly 300,000, the four categories account for 95.7% of general fund expenses. “In my judgment, they negotiated very generous terms to union contracts,” Mr. Winterstein said. “That is a common theme we've seen in municipalities where there is budgetary stress.” The situation in Stockton was compounded by an ill-timed 2007 bond issuance designed to help the city meet its pension obligations, the proceeds of which were funneled into the stock market just in time for the market's collapse in 2008. “It's as if you would have taken out a home equity loan and put it into the stock market,” Mr. Winterstein said. In terms of why Stockton ultimately pulled the plug and turned to bankruptcy, the most recent 2010 audited numbers show a $2.5 million short fall on a $178 million budget. The estimates for 2011 are for a $6.5 million short fall. The short fall estimates climb to $8.6 million for 2012, and then spike to $26 million for 2013. /images/newsletters src="/wp-content/uploads2012/07/twitter-bullet.png" Follow Jeff Benjamin